In my previous article I described my search for the best growth stock among media companies. My search started with four stocks: AMC Networks Inc. (AMCX), Discovery Communications Inc. (DISCA), The Walt Disney Company (DIS) and Viacom Inc. (VIAB). The criteria I consider most important for evaluating growth stocks, and which I based my search on, were: competitive advantage, growing revenue and EPS trends, sound business fundamentals and reasonable valuation. In the end, I chose Discovery as an investment because it had all of the aforementioned coupled with years of consistent growth and a unique brand of content. However, regrettably my search did not include Scripps Networks Interactive Inc (SNI), which is perhaps the best comparison to Discovery.
This article seeks to compare the two media companies, Discovery Communications and Scripps Networks Interactive, and analyze which stock is a better buy at current levels and which stock provides investors with the best growth going forward.
Let's have a quick view of both companies and the content that they create.
Discovery Communications:
Discovery Communications Inc. is a nonfiction media and entertainment company responsible for television networks like Discovery Channel, The Learning Channel, Animal Planet, Science Channel, Military Channel and Investigation Discovery. In total, the Maryland-based Discovery Communications owns and operates nine networks in the United States and its content is distributed across the world. The company's corporate website boasts over 1.7 billion cumulative subscribers to its content, which is broadcast in 45 different languages and available in 209 countries and territories.
The main focus of Discovery's programming is on science, the natural world and human beings' interactions with both. The company's impressive television lineup includes hit shows like "Deadliest Catch," "Gold Rush," ''Dirty Jobs,'' ''Mythbusters,'' ''American Chopper'' and a myriad of popular survival shows including ''Survivorman'' and ''Dual Survival.'' In conjunction with the British Broadcasting Company Ltd, Discovery is also responsible for critically acclaimed documentary series like ''Planet Earth,'' ''Frozen Planet,'' ''Life'' and the currently airing "Africa."
Discovery has shown that it is able to consistently deliver high-quality programming that attracts a wide variety of viewers around the world. The company's shows have consistently been top-tier in the rating department, just last Friday it had the most watched ad-sustained program in prime time in ''Gold Rush,'' as well as the third highest in ''Bering Sea Gold'' (Discovery totaled an impressive six shows in the top 10 on Friday Jan. 4).
The most intriguing aspect about the company is its remarkable ability to continuously create new content that is easily accessible to audiences around the world. The company basically has a lock on the documentary-style nonfiction television show. When viewers want to watch programming about animals they will most likely tune in to Discovery's Animal Planet. Similarly, when viewers want to watch programming about World War II they will turn to Discovery's Military Channel. The same goes for outdoor survival, health/fitness, and true crime shows, the offerings are extremely limited outside Discovery's own programming. The company's networks have become synonymous with certain types of programming and this gives the company an edge. It is what makes Discovery Communications such an intriguing company; it has very distinct brand-name recognition and very few competitors, the essence of a moat.
For a more comprehensive description and analysis on Discovery's content and its ability to successfully replicate its programming format, please refer to my previous article, Discovery Communication: A Natural Investment.
Scripps Networks Interactive:
Scripps Networks is a nonfiction media and entertainment company responsible for popular programming channels like Home and Garden TV (abbreviated HGTV), Food Network, Travel Channel and Cooking Channel. In total, the Tennessee-based Scripps Networks owns and operates six distinct networks and its programming reaches viewers on every continent worldwide.
Scripps refers to its network lineup as "lifestyle media," which is a very accurate description of the majority of the company's channels. Almost every network caters to a specific aspect of people's lives: HGTV offers "inspiration to create your own unique space at home," Cooking channel is "dedicated to today's passionate food lover" and Travel Channel "offers a vast array of consumer touch points" to help people explore more of the world.
Similar to Discovery, Scripps creates content that is geared remarkably well toward specific target audiences. Content that appears on channels like the Food Network and Home and Garden is material that viewers simply cannot find anywhere else. If viewers want to watch a program about baking recipes, chances are they are tuning in to one of Scripps' food-oriented networks, as there are almost no other channels with similar content.
The evidence is in the results: Food Network recorded over 1.1 million viewers a night in 2012, making last year the network's best year ever. Shows like ''Rachel vs. Guy Celebrity Cook-Off'' and ''Chopped All-Stars'' helped Food Network retain its coveted spot in the top-10 cable network club. The success is not limited to Food Network: it was recently announced that HGTV, fueled by the premieres of hit shows "Hawaii Life" and "Island Hunters," held the top spot among all ad-supported cable networks on New Year's Day among key age groups, totaling over 18 million viewers, an 11% increase from the same day last year.
Equally impressive is the way Scripps compounds the success of its channel lineups with online content; each of the six networks has its own, content-oriented website and cumulatively the sites boast an impressive 18 million unique visitors per month. The nature of Scripps programming, primarily ''how-to shows,'' lends itself extremely well to frequent, dedicated online interaction amongst viewers. For instance, the Food Network website features a plethora of cooking recipes from the channel's lineup of celebrity chefs. The thousands of recipes available for free basically render cooking books useless! It is no wonder the company attracts such loyal viewers to its sites with such consistency.
In much the same way Discovery has a lock on the documentary-drama TV segment through popular networks like Discovery Channel and Animal Planet, Scripps has a powerful stranglehold on the how-to lifestyle segment with unrivaled networks like HGTV and Food Network. The content on all of Scripps' networks is so finely tuned to specific target audiences that the company has hardly any direct competitors.
Content Conclusion:
Both Discovery Communications and Scripps Networks have very unique brands of content with relatively little competition and as such both companies have strong competitive advantages in the content creation sector. Both companies can generate fresh content rather easily by focusing on larger viewer trends. Take for instance the recent shift toward more upbeat real estate programming that both companies are actively pursuing. The Wall Street Journal recently reported that both Discovery and Scripps are creating shows designed specifically to appeal to homeowners as a play on improving housing trends. Both companies have the ability to shift content to the tune of the viewer at a moment's notice and this is what makes both companies forces to be reckoned with going forward; there is literally no end to the content that both can create.
Discovery definitely has the stronger channel lineup because its suite of networks is more diverse and the majority of its content attracts much larger numbers of viewers. However, Scripps and Discovery have two of the strongest media portfolios in the business and as far as pure content creation companies go they are the two absolute best. Also, each company's content offerings are different enough that an investor could conceivably own both at this point, as there is hardly any overlap between both companies' network lineups.
However, we must dig deeper to see which is the better buy.
Growth:
Company | Discovery | Scripps |
Revenue Growth (2011) | 12.47% | 10.1% |
Projected Revenue Growth (2012) | 6.7% | 12% |
Projected Revenue Growth (2013) | 7.0% | 7.8% |
EPS Growth (2011) | 90.5% | 20.7% |
Projected EPS Growth (2012) | 4.7% | 17.4% |
Projected EPS Growth (2013) | 23.5% | 11.6% |
(numbers from MSN Money, Yahoo! Finance, as of 1/15/13)
Both companies have been growing relatively well although Discovery has been a little more volatile, especially with regards to EPS. Both companies are projected to average well over 10% EPS growth from 2011-2013 and are within striking distance of 10% revenue growth for the same time period (DISCA is projected to average 8.7%, SNI 9.9%).
Going forward, Scripps is projected for slightly better revenue growth in 2013 but Discovery is projected for much better EPS growth in the same year. Both companies have track records of consistent growth and neither one appears to have a significant edge in this category.
Growth Catalysts:
Discovery has been growing very rapidly outside of the United States, specifically in Latin America, where the company is a top-five pay network and just recorded its best quarter ever, and in Australia, where the company recently achieved its highest-rated launch of a new series. What's more is that Discovery has been making aggressive moves at expanding into largely untapped areas of the world as well as into different types of content. In its latest round of proposed deals worth just under $2 billion, the company will look to buy 12 Nordic networks, channels with a focus on unscripted drama, from German company ProSiebenSat as well as a French sports network called Eurosport. This will further expand Discovery's reach and revenue stream and give the company a foothold into programming areas it has never had before. If Discovery's past success in global expansion is anything to go by, the company could experience its first real success outside its usual non-scripted documentary segment in 2013.
Additionally, Discovery has been busy rebranding many of its current networks to better optimize the success of each. The Oprah Winfrey Network, which has been notorious for losing money since Discovery acquired half of it, looks set to have one of its best years ever as it signed a major deal with Tyler Perry for exclusive rights to all of his original television programs in the future, two of which are scheduled for mid-2013 releases.
Scripps Networks, although not yet as global as Discovery, looks set to see impressive growth as well going forward. The company is focusing its efforts on improving the networks that have been lagging behind its more popular channels like HGTV and Food Network. Travel Channel is first up on Scripps' list. Spokesman Mark Kroeger recently explained, "Travel Channel is where we see the biggest opportunity for the growth of the company. Defining that brand and genre is the company's leading priority." The growth at Travel Channel lags significantly compared with Scripps' flagship networks (4.9% in Q2 2012 compared with Food Network's robust 17% in the same quarter) and the company appears committed to rectifying that.
Scripps CEO Ken Lowe further explained that Travel Channel "is probably our single biggest opportunity" in terms of growth over the next couple of years. Lowe estimates that Travel Channel sees 400-450 hours a year in the average household versus around double that for both HGTV and Food Network. His aim is to get those yearly Travel Channel numbers way up, possibly as high as the company's more popular networks. With many new shows scheduled to release in 2013 on Travel Channel, there could be a tremendous amount of growth in 2013. Lowe went on to say he believes the channel could be a top-15 network.
CEO Ken Lowe had some very interesting things to say about Food Network as well, which is the company's shining star as of late. Lowe projects the channel to be a $1 billion dollar network in a few years. In 2011, Food Network managed revenue of $745 million and throughout the first nine months of 2012 the network is growing at an impressive rate of 13.8% (on revenue of $616 million). If current growth rates can be sustained, or even accelerated, then Food Network will be well on its way to becoming a $1 billion entity sooner rather than later.
The edge in growth catalysts is squarely in favor of Discovery Communications, as the company has a much larger reach and more aggressive plans to expand revenue. These plans are not without risk, however, but management's past success leads me to believe Discovery will fare well with its new expansion plans.
Fundamentals:
Company | Discovery | Scripps |
Market Cap | 25.1B* | 8.8B |
Total Debt | 5.23B | 1.38B |
Total Cash | 1.65B | 439.2M |
P/E (TTM) | 24.64 | 17.91 |
P/E (forward) | 19.93 | 15.58 |
Dividend Yield | N/A | .81 |
Net Profit Margin | 24.25% | 30.29 |
(numbers from MSN Money, Yahoo! Finance, as of 1/15/13)
* Includes DISCA, DISCB, DISCK shares
Both companies carry some debt, although Discovery's is larger in relation to its market cap (20.7% of market cap compared to 15.7% for Scripps).
A big difference is in valuation. Discovery is significantly more expensive compared with Scripps with regards to trailing twelve month P/E as well as forward P/E. Additionally; Scripps offers a dividend of .48 cents, or .81%, while Discovery does not currently offer any dividends. And finally, both companies have very nice profit margins but Scripps Networks edges out Discovery in this category as well. The clear edge in fundamentals goes to Scripps Networks as it beats Discovery Communications in almost all meaningful categories.
Charts:
The following are one-year charts of DISCA and SNI from Yahoo! Finance. I have included 50-day, 100-day and 200-day moving averages as well as MACD and slow stochastic indicators.
DISCA:
(click to enlarge)
Discovery returned 55% in the last year.
SNI:
(click to enlarge)
Scripps returned 35% in the last year.
Both stocks have upward trending charts, which is what all growth investors need to see. The chart edge goes to Discovery as it provided investors with a much better percentage return over the last year. Most importantly, DISCA is currently above all of its moving averages and has an upward trending MACD and stochastic. Scripps remains above its 200-day moving average but is currently below its 50- and 100-day moving average.
Important to note is that the MACD indicates the sell-off that began in mid-October for SNI has ended and buyers have started to step in. Confirmation of an uptrend will be given when the stock regains all of its moving averages on above-average volume. Discovery also appears overbought at current levels, up 20% in the last two months alone.
Conclusion:
Discovery Communications and Scripps Networks are very similar companies in a challenging industry. With strong network lineups, steady growth and solid fundamentals they represent the best growth plays in the pure media/content creation sector. Both companies have long-term growth stories that I believe will remain viable well into the future and both stocks have presented investors with nice returns over the last year, easily outperforming the general indices. Going forward, both stocks should continue to reward investors and I believe both stocks can be owned as the two companies' media portfolios compliment each other nicely.
The major difference is that Scripps Networks is trading at more reasonable multiples, offering investors similar growth at much better valuation at the moment than Discovery Communications. A main reason for the increased multiple on Discovery's part is that the company is poised to enter vast, new areas of growth with its most recent international expansions. Discovery's global expansion does warrant a higher P/E in my opinion but the stock may have gotten a bit ahead of itself.
I recommend waiting to buy either stock until both companies report earnings in the coming weeks (DISCA reports on 2/14/13, SNI reports on 2/7/13). If projections for 2013 remain the same, I recommend buying Scripps Networks if the stock regains its moving averages on volume and Discovery Communications on any significant pullback to the $60 area.
Disclosure: I am long DISCA, DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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